Critiquing the Foreclosure Process: An Economic Approach Based on the Paradigmatic Norms of Bankruptcy
UVA Law Faculty Affiliations
The greatest financial hardship faced by the typical mortgagor is the forced sale of her home. In most states, a mortgagor who cannot pay the debt secured by the mortgage must enter into the never-never land of an arcane real estate procedure known as "power of sale" foreclosure, which she "consented" to pursuant to the terms of the mortgage contract. In the vast majority of cases, the sale price realized at such a foreclosure sale will be so inadequate that not only will the mortgagor lose her home but she will also lose any equity she owns in the property.' If the amount realized at the foreclosure sale does not cover the mortgagor's debt, the mortgagee may further compound the mortgagor's financial distress by obtaining a deficiency judgment for the difference between the amount of the debt owed and the amount realized via the foreclosure sale. Finally, in many states, this emotionally charged situation may be exacerbated if the mortgagee is able to purchase the property at the foreclosure sale by making a ridiculously low bid that has no correlation to the fair market value of the property.
As one might expect, a hue and cry is often raised regarding the manner in which mortgagors lose their homes and the fact that their equity is not protected. If the deterioration of the mortgagor's financial condition reflects larger economic or societal problems, the mortgagor presumably will not be alone in losing her home and her equity. Indeed, if recent events in the Southwest (particularly Texas) are any indication, many mortgagors will lose their jobs and be unable to make their mortgage payments through no fault of their own. Inevitably, in such times, published reports will circulate that a foreclosed home that sold for X thousand dollars at the foreclosure sale was resold by the foreclosing lender for X-plus thousand dollars shortly thereafter. The fact that none of the excess generated at the second sale of the property will benefit the mortgagor further hastens the cry for reform.